One might think that the dispute process for electronic funds transfer (EFT) errors would be simple - a customer submits a claim, the financial institution investigates, and money is either refunded or it isn’t, depending on the results of the investigation. Unfortunately, the rules for handling disputes under Regulation E are quite complex, confusing, and even unclear at times.
Case in point: EFT disputes for pending transactions.
Background on Regulation E and Pending Transactions
Over the years, I have seen a number of questions relating to how Regulation E error resolution rules relate to pending transactions that have not yet settled to a customer’s account. The challenge that many bankers face is a customer will call in to dispute a transactions they see on their account as a “memo post,” but since the transaction is pending, it may never actually post to the account or will be finalized in an amount different than the original “memo post” amount.
For bankers, this is challenging as Regulation E has strict timeframes for handling disputes, but those rules were created decades ago and don’t reflect changes in current technology. Therefore, the EFT dispute rules leave a number of challenges in regards to pending or “memo post” transactions.
Specifically, the question I want to discuss in this article is this: When does Regulation E apply (and thus when do the error resolution timeframes start) for pending or “memo post” transactions?
Understanding Pending Transactions and Regulation E
As we take a look at this topic, let me start by explaining what I mean by a “memo post,” or pending transaction. As you can imagine, there are a number of different scenarios when it comes to memo post items and pending transactions. First, I want to clarify that if the transaction is an ACH item that has a same day effective date that will hard post at the end of the day, I would always error on the conservative side and consider the dispute the day it was received. (Also, just to clarify, I’m limiting this discussion to Reg E and not ACH or Visa/MC rules - so you will need to review those rules for applicability in certain dispute situations.)
That said, the challenge faced by most bankers comes when you have a “preauth” or memo hold from a debit card purchase that may or may not post until the final transaction comes through. Examples of this include holds from hotels, gas stations, restaurants, ect. where the final amount often differs from the memo amount – if the charge even comes through. In these cases, most systems do deduct the memo amount from the available balance, but the ledger balance is not effected until the transaction is finalized.
In order to determine if/when Regulation E applies to these “preauth” or memo holds from a debit card purchase, we first need to determine if a pending/memo transaction is considered an “error” subject to the 1005.11 error resolution procedures.
Are Memo/Pending Transactions an Error Under Regulation E?
To be an “error” under Regulation E, and thus subject to Regulation E’s error resolution rules, a transaction would have to be 1 of 7 things listed in 1005.11. The seven items included in the definition of an “error” under Regulation E include:
An unauthorized electronic fund transfer;
An incorrect electronic fund transfer to or from the consumer's account;
The omission of an electronic fund transfer from a periodic statement;
A computational or bookkeeping error made by the financial institution relating to an electronic fund transfer;
The consumer's receipt of an incorrect amount of money from an electronic terminal;
The consumer's request for documentation required by § 1005.9 or § 1005.10(a) or for additional information or clarification concerning an electronic fund transfer, including a request the consumer makes to determine whether an error exists under paragraphs (a)(1)(i) through (vi) of this section.
As you would probably guess, IF a memo post transaction is considered an “error” under Regulation E, it would most likely include either 1) an unauthorized EFT or 2) an incorrect EFT to or from a consumer’s account. Either way, the transaction must be an “electronic fund transfer” to be considered an “error” – so we must look at the definition of an EFT found in 1005.3 to see if the error resolution rules apply to pending/memo transactions.
Under 1005.3(b) of Regulation E, an electronic fund transfer includes “any transfer of funds that is initiated through an electronic terminal…”. In this definition, the key question becomes this: what is a “transfer of funds?”
Unfortunately, the rules don’t specifically answer this question, and it is often dangerous to make assumptions when a rule is silent on a particular topic. That said, it would seem to be a stretch to say that a complete “transfer of funds” has taken place when a pending/memo transaction only affects the available balance and not the ledger balance. As explained earlier, a pending/memo transaction often does clearly turn into a completed “transfer of funds,” but other times it does not (e.g. a hotel hold).
To further determine if a memo post/pending transaction is considered a transfer of funds, we can look to the commentary to see if provides us with any hints of an answer. Specifically, the commentary states the following in regards to examples of funds transfers that are covered:
“iv. A transfer from the consumer's account resulting from a debit-card transaction at a merchant location, even if no electronic terminal is involved at the time of the transaction, if the consumer's asset account is subsequently debited for the amount of the transfer.”
While this comment seems to be there to address instances when an electronic terminal is not involved (and is most likely a reference to mostly outdated technology), it tells us that a transaction IS covered IF “the consumer’s asset account is subsequently debited” - implying that it would not be covered if the account was not subsequently debited. Now, if the determination is reliant upon the subsequent debiting of the account, then I’m not sure how one would know if a memo transaction is covered until the transaction actually posts.
Therefore, it would appear to me that we don’t technically have an electronic funds transfer until the transaction actually posts and a “transfer of funds” takes place.
All of that said, I do believe this to be somewhat of a gray area and, therefore, erroring on the side of caution (and the consumer) is always the better approach when possible. Furthermore, financial institutions should consider applicable Visa/MC and ACH rules whenever dealing with an electronic funds transfer dispute.